Date of Award


Degree Type

Honors Paper

First Advisor

Frank W. Bacon, Ph.D.


This study tests the trade-off and pecking order theories about the debt and dividend capital decisions for non-stock electric cooperatives. Decisions to finance investments with debt or equity are important because they determine the firm's capital structure. With the trade-off theory there is an optimal balance of debt and equity, and the firm uses debt until it is more expensive than issuing equity thus reaching the firm's optimal capital structure. Meanwhile, the pecking order theorem contends the firm should use internal funds first, then debt, and equity as a last resort. Both theories have the same fundamentals for the payout of dividends. More profitable firms with less risk and debt should pay out more dividends. This study examines non-stock.firms, whose dividend is referred to as a capital credit. Capital credits or dividends are the accumulated profits (or retained earnings) the not-for-profit cooperatives payout to their owners who are also the firms customers. Considerable debate in Congress over health care reform centers on using the "cooperative model" to extend health insurance to millions of Americans. This study analyzes rural electric cooperatives (RECs), firms identical to the "cooperative model" being considered by Congress in the health care debate. Financial datafrom 807 RECs is examined in an OLS regression analysis by testing the effects of selected financial variables on the debt and dividend decisions. For the debt decision, results support the pecking order theory but are mixed for the trade-off hypothesis. Results on the dividend decision are mixed/or both theorems.



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